A guide to legal entity rationalization

With any legal entity rationalization, we focus on reviewing your subsidiary structure to help you identify and resolve any conflicts and redundancies. The goal is to create a legal and tax structure that is easier to manage and more effective.

Another term for entity rationalization is “corporate simplification,” due to the reduction of legal entities. Typically, there are two ways to achieve legal entity rationalization. The first is to search for dormant entities to ensure you’re not spending unnecessary maintenance money. However, simply eliminating dormant entities does not usually result in large cost savings.

Alternatively, you can analyze the entire organizational structure to assess each entity individually. Some companies only need an entity to support a small number of employees. Others may decide to use an employer of record solution like GEO solution instead of registering a foreign entity themselves. Whatever you choose, the business cannot operate internationally without some sort of foreign entity established in the country.

The difficulty of managing a subsidiary structure increases as a company grows, creating additional risk and liabilities. Without undertaking legal entity rationalization regularly, an organization can quickly face substantial costs and the threat of the legal entity not being in good standing with the local government. The three most common challenges large structures face are:

Recurring services such as payroll, accounting, and tax and compliance obligations result in additional burden and cost regardless of the quantity of overseas employees. Corporate governance will understand the long-term advantages of the rationalization process.

Every new legal entity is unique, and the organization must be prepared for a unique set of risks which will grow as the group structure grows. As companies expand to new markets and create new entities, they must increase monitoring and management to reduce issues such as forgotten filings, missed new regulation and insider trading.

As a company expands, the challenge of resourcing becomes impossible to ignore. The compliance team often becomes overburdened or hiring more people onto the team becomes a must. One requires a larger budget, while the other can cause employee dissatisfaction and a deterioration of control or governance.

Steps for rationalization: We outline the core steps you'll need to take to proceed with your new legal entity structure. This includes five areas of consideration as you analyze your existing operations.

Closing business operations: Part of your rationalization process may include the decision to close business operations in certain countries. There are eight key considerations to make sure you do this in a compliant and efficient manner.

Hiring alternatives: For businesses that want more flexibility to hire in foreign countries, as well as a consolidated hiring process, consider our GEO solution. We can hire compliantly anywhere in the world, and you never have to worry about your legal entity structure.

Learn more about how we can assist you in setting up your legal entity.